Sen. Pat Toomey continues war on regulation, spending

By Brent Burkey,
July 12, 2013 at 9:46 AM

Sen. Pat Toomey Photo/Submitted

U.S. Sen. Pat Toomey has amassed an active career in Congress in the past two years.

Most consistent in that time has been the Pennsylvania Republican’s fight against government regulation of private industry. Toomey also is an opponent of increased federal spending, which he says only increases deficits and debts, placing a speed inhibitor on the economy.

The 52-year-old Lehigh Valley native has experience in the business world, starting with the foreign currency departments of Chemical Bank and then Morgan, Grenfell & Co. in the 1980s. Toomey also opened an Allentown restaurant with his brothers in 1993.

The senator spoke to the Business Journal about federal policy and its effect on manufacturing, workforce and other parts of the economy.

A: Let's go back for a second to how we got here. In 2011, there was a big battle about whether and under what circumstances to raise the debt ceiling. And the deal that was struck in the interim was based on the idea that for every new dollar that would be authorized in borrowing, there would be a dollar in savings from otherwise projected spending. So we cut spending as a way to diminish this problem long term because we're on an unsustainable fiscal path.

In the first fiscal year, which is this fiscal year, that comes in the form of across-the-board spending cuts to a large number of accounts. There are some that are exempted, like Social Security benefits, which were taken completely off the table. Most of the remainder of the federal government was subject to these cuts and we call them sequestration. In subsequent years, starting in Oct. 1, the new fiscal year that begins this fall, the savings that are achieved over the 10-year period come in the form of caps on discretionary spending. So, statutory limits on how much money can be spent both on the defense side of our discretionary spending, which is about half of our discretionary spending, and on the non-defense. So that's kind of the complicated story as to where we are.

The reason I make the distinction is because it's only for this fiscal year, which ends in a couple months, that we have this situation where you have these cuts that occur without a whole lot of thought going into them because there's this automatic across-the-board nature to them. In all subsequent years, the Congress is free to allocate the resources, provided it doesn't exceed the total cap on spending. My own view has been from the beginning that it's absolutely essential that we achieve the savings of the sequester in the first year and the spending caps in later years.

But it never occurred to me that it's a good idea to have these across-the-board cuts. It's much better to use a little discretion and cut wasteful and duplicative and less effective programs and leave in place those that are more effective. It's common sense, right? Anyone would do that in a business, in a household, and the government should, too, but it doesn't.

So I introduced a bill that would've given the administration a lot of flexibility to cut where they should cut and leave intact where they ought to leave intact. And I was really surprised and disappointed that they opposed the bill. So the administration opposed legislation that would make the cuts of the sequestration, to minimize the cuts and the disruption. And, you know, that's just for political reasons. They wanted to demonstrate that the sequestration was too painful, too disruptive, and therefore we had to abandon the entire effort to control spending. Fortunately, from my perspective, they kind of lost that argument with the American people. And they recognized this a couple months ago when the fight occurred over the FAA funding. You may remember that was the big high-profile manifestation of this battle. The administration insisted, well, we'll just have to furlough air traffic controllers and shut down towers and inconvenience travelers, thinking that would turn the public against the cuts. In fact, it didn't work. The public understands we need to get a control on spending and this is an administration that was trying to be disruptive. And they capitulated and agreed to a bill that passed with bipartisan support. It gave precisely to the FAA what I was advocating we do for the rest of government. Which was give the agency heads, the department heads, the discretion to make the cuts in the least disruptive way. Unfortunately, we've only done that for the FAA and it should be done more broadly.

At this point, considering how close the next fiscal year is, is there any initiative in the Senate or Congress as a whole to work on some of those more exacting cuts you were talking about?

It's becoming less and less likely that's going to happen this fiscal year, because it's winding up. We've got three weeks in session when we go back a week from today (July 1) and then we're out for the month of August. We come back after Labor Day and you're left with four weeks in the fiscal year. The year's basically over at that point. Now it's really, as a practical matter, a question of making sure we're budgeting properly for the next fiscal year. That we keep the spending within the limits that are set in law now. And this is a matter of great dispute. This is highly controversial. The president and the Democrats in the Senate believe we should ignore the law, spend much more than that, because they don't like the fact that we're going to have caps on discretionary spending. I strongly disagree. We still haven't done enough to get spending under control. We must at least capture the savings that are now in law. And we have the flexibility to design them. We can go through the appropriations process and craft the bills line by line to make sure we're funding the priorities and not funding the lower priorities.

And if you don't, it reverts to the across-the-board cuts again?

Well, that's correct. But with a big caveat, right. So the way the law is set up now, if Congress passes appropriations bills and they get signed into law and the sum total exceeds the caps set in statute now, then another across-the-board cut would occur to bring the sum back down under the cap. However, you have to ask yourself as a practical matter, if Congress has the will and the votes to pass legislation that exceeds the cap, it's likely it will lift the cap or suspend the cap or otherwise subvert it. Because the reason, or likelihood, that they have the votes would suggest they don't want the caps to go into place. So it's not a guarantee, but it's likely, that second round of sequestration in fiscal 2014, it's unlikely, in my view, it will occur, because we'll either live with the cap or Congress will have intended to exceed the cap.

So basically, anything after Oct. 1, if we have sequestration, would be because Congress overspent the cap?

That's exactly right. That's the way it would happen and that's why I'm saying, it could happen that Congress overspent the caps and then do nothing and allow the sequestration to then occur, to be triggered, to bring us back under the caps. But I think it's unlikely. I think there will be an effort to lift the cap. That's what Congress has done many times in the past with caps. That's why caps are better than nothing in terms of spending discipline, but they're not foolproof by any means.

You asked for an analysis from the Army of the Bradley fighting vehicle production as to what they need and what should go forward. Where does that stand today?

As of today, the Defense Department is overdue with the report that they are required to produce because of the amendment I put on the defense authorization bill to report specifically on the economic consequences of temporarily shutting down the Bradley vehicle line. As you know, they're contemplating a several-year hiatus, and what we believe is that the cost of restarting this line and the lost expertise, the loss to suppliers, the disruption to the entire chain if you suspend the line — knowing you have to start it again several years down the road — that cost is probably greater than the cost of simply keeping it in place. So that's what we've asked them to determine. Basically, do a thorough economic analysis of this before you tell us you're going to save money by cutting this line. It's not at all clear that you would, being that you have to restart it a few years down the road. They're overdue on that. We are sort of in the process of rattling their cage to get an answer on this report.

One of the things the Army had said was that they have all the Bradleys they need right now. And when you look at some of the reports, they're looking for a replacement to the Bradley, which is more than 30 years old at this point. How do those things affect the analysis, and even with a lot of jobs at stake, should we be spending money on something that's ultimately going to be replaced?

First and foremost, we should be approving and funding military technology and equipment that suits the needs of our armed forces. It should not be that we would fund something, that's not really needed, as a jobs program. That's not the purpose of our defense department. But as you know, what we do in Pennsylvania with the Bradley vehicles is we upgrade them. So it's true the basic platform is relatively old, but when they come off the line in York, these are not 30-year-old machines. They're extremely well equipped with the most recent, cutting-edge technology. They're very, very sophisticated and very, very effective in the field. So I don't think it is a widely held view in the Army that this is an obsolete piece of equipment. I think there is a lot of support for continuing the upgrades, so they remain very sophisticated.

So it's not a "this or that" type of thing?

I don't think that's the case. I think there's a strong sense that we ought to continue to upgrade the vehicles that come out of the field. And when they are newly refurbished and upgraded, they're really very effective… Just one other thing to illustrate how frustrating this can be when we're not making wise decisions about allocating scarce resources. We have depots in Pennsylvania, big ones. Letterkenny being one of them, Tobyhanna up in the northeast being another one and the sequestration that impacted on these. One of the things that my staff and I did was go through line by line on some of the defense appropriations. And you look at some of the ways money is being spent, and you really scratch your head about why money is being spent that way when we've got something as fundamental as operations and maintenance, literally training and field operations that are essential… Particular example I went after is a budget item. It's in the tens of millions, it's not a massive number but it's not trivial, and it's money that was budgeted to have the military research remote biodiesel refineries. As it happens, these biodiesel refineries, if you put enough input in, you can get a burnable fuel out of it, but it roughly costs $17 a gallon. Have you seen any diesel that costs $17 a gallon? You can't find it. It's so incredibly inefficient that it just doesn't make any sense. Now, the proponents on the other side said there could be a breakthrough some day and this would be wonderful. To which my response is, great, if that's your belief, then fund the research at the Department of Energy or somewhere else. But don't chew up precious resources from the defense department that's costing us training and maintenance of really important equipment on this, what very well could be a pipe dream, on some alternative fuel, when we have lots of fuel available. So I offered an amendment to switch the funding. Wouldn't spend any more. Just take some money from this account and move it over to the operations and maintenance account, but we couldn't get it to pass on the Senate floor. That would be helpful to Tobyhanna and Letterkenny, both.

The farm bill just fell apart in Congress. One of the things you talked about often was the sugar program, yet proposed changes to it failed in both houses of Congress. What happened, and what does it mean to manufacturers that want to buy sugar on an open market?

We got closer both last year and this year than we have in a long time. But you're right, we came up short. I think part of the problem is there are just a handful of sugar producers who benefit from the various ways in which we protect the domestic sugar industry, artificially inflate the price of sugar. That's good for them, they make a lot more money, but it's terrible for all consumers, because we all consume sugar. We all have to pay for it. It's also, by the way, terrible for manufacturers. There is a commerce department study that shows for every job protected in the sugar production industry, three jobs are lost in the food production business, because it just makes so much economic sense: Move your candy company to Canada. They don't have these crazy sugar policies. They can buy sugar on the free market at much lower costs. So it's terrible policy. What happens is the various special interests within the ag community will circle the wagons and protect each other. And that's what happened. So you have senators and congressmen from areas who never produce sugar, never will, but maybe they get peanut subsidies or subsidies for some other agricultural product. And they feel like, well, let's all hang together here, because if a guy like Toomey gets a win on sugar, he may come after the peanut subsidies next.

Are they wrong in that?

No, they're absolutely right in that. Totally correct. So we'll have a stronger economy that's much more fair and makes more sense, and consumers pay less for food when we finally work this out. We have massive subsidies to agribusiness and it makes no economic sense.

I've always wondered about the price of sugar. Because I can't ever remember the price of sugar being so high, where it was a choice between sugar or paying the bills, and so the program must go. Sugar isn't all that expensive in retail.

And that's why they get to continue this, right. Because there's a handful of producers who make huge amounts of money, but when you spread that out over every American consumer, it's a pretty small amount, that's true. But when you do that for all sorts of things, it adds up for consumers. That's what we do in agriculture and it's what we do in other policy. It's the classic problem of concentrated benefits and dispersed pain. The people who receive the concentrated benefit, they will surely be a more assertive and more concerted and probably a more effective lobbying group than the millions of people who are part of the dispersed pain. It's one of the problems we have with many government programs.

It could be said, and I know this is the case the sugar producers make, companies like Hershey are not small companies and they make a lot of money off of sugar. And yet prices haven't gone down, in fact they've raised prices, at the same time they've been decreasing their workforce. Some people may look at that and say, sure, Hershey is going to make out by being able to expand their profit margin, but the farmers in the Midwest are going to lose.

There's a lot of problems with that analysis from my point of view. It shouldn't be the role of the government to decide how much people are going to make, and who are the winners and losers, and how much we're going to force consumers to subsidize your product, but not his product. That's totally not the appropriate role of the federal government. What the federal government should do is take its hands off these things and allow a marketplace to determine how resources get allocated, and who buys what at what price. I would strongly reject the idea that the federal government ought to decide what is the appropriate profit for this industry versus that industry, and weigh in to manipulate things to get the outcome they want. That's really bad policy — that is what we do in agriculture policy and it's a really bad idea. The other point I would make is that as long as the government doesn't prevent competition, then competition will drive prices down and eventually you get to where there are normal returns on profit in that industry. So innovations allow companies to leapfrog ahead, and if they're at the cutting edge, the innovations will result in unusually high profits for them until the innovations are adopted by the industry. That's the natural cycle for business and industry, and the government shouldn't interfere.

We've been talking to a lot of small companies, and they can't get a loan. They go to multiple banks, but no one is lending. Is there something that should be done at the federal level?

Yeah, the government should get its hands off. Seriously. The reason credit is so hard to obtain right now is the unprecedented avalanche of new government regulation that makes it very, very hard for small and medium-size banks to provide the capital they would like to provide. I have first-hand experience in this. Back in 2005, I helped launch a community bank in eastern Pennsylvania and western New Jersey where we did business. And I was absolutely stunned at the compliance costs. The regulations you had to comply with, the reports you had to file, the nature of the files you had to maintain, and all you had to do to document so many things. And that was before Dodd-Frank (banking regulations that followed the 2008 financial crisis). Then Dodd-Frank came along and took it to another level entirely. I hear this every day across Pennsylvania from community banks, small banks, medium-size banks. They've been hiring more compliance officers in the last several years than they've been hiring loan officers. It's not that they don't want to make loans. I mean, think about it. They get deposits. A lot of banks are deposit rich right now. What are their options for investing that money? Traditional Treasury (bonds) are a common place for banks to park their money. A two-, three-, five-year Treasury is yielding them 1-and-a-half percent right now. If they make a loan to a good, solid small business, they'll get 4, 5 or 6 percent. That's a no-brainer as to which asset you'd like to have on your books. The problem is, the latter category requires so much hassle and aggravation to satisfy the regulators that it's just very, very hard for them to get it done. I think we wildly over-regulate small financial institutions, which had nothing to do with the financial crisis. The local community bank contributed zero to the financial crisis we had. But now the regulators have come down like a ton of bricks on these guys. It's absolutely true that credit is hard to get. And I think its because the regulators have gone absolutely over the top.

In Central Pennsylvania, the number of manufacturing establishments haven't dropped all that much in the Great Recession. We're down about 6 percent. If you still have a job in that industry, your wages have kept up with inflation, but we're in a crisis of manufacturing workers. They're down about 16 percent. What I'm hearing, the people who are still in business are busy as all get-out. They have more business than they know what to do with, but they're too afraid of tomorrow to start hiring workers. That's a perception issue that goes to the role of what the role of the government is. If not a program, or throwing money at the problem, it's an issue of leadership. What can be done at the federal level to help that problem?

I think you're very much on to something. I think companies, even companies where business is fairly good, are far more reluctant to add workers than they have in the past, given the growth. I think a big part of it is Obamacare. If you ask, what is the source of the reluctance, the only thing they know for sure is their costs are going up, probably a lot. That's probably as much as they can quantify. All these mandates aren't free. Providing all these mandates are going to have a big cost. The pricing ratio that Obamacare forces on health care, whereby you can't differentiate between inexpensive, young, healthy workers and much more expensive older workers by a ratio of 3 to 1, despite the fact the cost ratio might average more like 8 to 1 or 10 to 1. So you have all these distortions that are happening, many of the rules haven't been finalized, it hasn't fully gone into effect, and so there are a lot of businesses that say, "I'm not sure I want to take on additional workforce when I don't know what they're going to cost. I know what I can pay them, I can quantify that. If they're willing to work for that, I'm sure we can reach an agreement, but I have this wild card out there. I don't know how much their health will cost." So that's one example out there, but it's probably the biggest example where the government is imposing huge new costs that are not related to increases in productivity. And they're somewhat unpredictable. That's a huge disincentive to grow your workforce. One of the other clear manifestations is that it's 50 workers and above that triggers the mandates. So if you're a manufacturer in Central Pennsylvania and you have 48 employees, business is pretty good and you see some growth. You have a deal worked out where you provide health care and your employees are happy with it. The costs are going up, but you can live with it. You hire two more workers and you're in a whole new ball game. All kinds of new mandates and the cost goes up dramatically. Yeah, there's a lot of employers saying I'm going to find a way to stay at 48. So we have policy now that creates a huge disincentive to hire workers when we desperately need to be hiring workers because unemployment is still way too high. Failed federal policy is a big part of this.

The rising cost of benefits were a problem before Obamacare. So what is part of the solution? As a reporter in York, they would get a $50,000 grant to hire a cop, but they would say, 'We still need $50,000 for the benefits.' This was an issue that people were having trouble hiring at all levels before Obamacare. It was a proposed solution, and if it's not it, then what does the federal government do?

That's fair, but I think the problem has gotten worse under Obamacare, not better. Obamacare never really attempted to deal with rising costs, I think. I think the ultimate driver to costs before Obamacare, and it continues to haunt us now, is the reliance on third-party payers. The fact that, again because of government policy, we've separated the role of the health care consumer from the health care payer. Almost everyone has their health care paid for by someone else, either the federal government if you're in Medicare and Medicaid, or it's your employer if you're employed in the private sector. And that's the overwhelming majority of Americans. So it's not surprising that most people don't know what their health care costs and they don't care, because someone else is paying for it. So you don't have the normal market forces that you have in other segments of the economy. It's interesting, if you look at the segments of health care that have not been historically dominated by third-party payers. The more elective areas especially, but eye care, cosmetic surgery, those sorts of things — the quality has improved and the cost has gone down. Look at Lasik surgery. I got Lasik surgery about 15 years ago. It was several thousand dollars, about $5,000 or $6,000 to do it. Now you can get it done for 600 bucks, with better quality and better outcomes. That's what happens when people spend their own money, or a portion of their own money. They care what things cost. They shop around and they insist on getting real value. We've prevented that normal functioning of the market in health care to a large degree, and I just think Obamacare makes it worse.

What is your priority when the Senate gets back into session?

My priority remains — especially now that we're going into what ought to be the appropriations process, we're heading toward the end of the funding for the fiscal year, and shortly after that a debt ceiling battle — my priority remains finding something meaningful to put us on a sustainable fiscal path. Because we have a federal government where spending is out of control, deficits are way too large and we're mounting debt at an unsustainable pace. So I spend a lot of time also trying to push back excessive regulation so we can have more direct economic growth and job creation. But I believe our unsustainable fiscal path is also contributing to a much weaker economy than we should and would be having.